Cash Equity: Definition, How it Works in Investing, and Example

What Is Cash Equity?

Cash equity most often refers to common stock and the (spot) cash equity market that involves the large institutions that trade blocks of stock with firm capital and on behalf of customers. These firms are themselves referred to as cash equity players.

Cash equity is also a real estate term that refers to the amount of home value greater than the mortgage balance. It is the cash portion of the equity balance. A large down payment, for example, may create cash equity.

Key Takeaways

  • Cash equity generally refers to the portion of an investment or asset that can quickly be converted into cash.
  • In investing, cash equity is the common stock issued to the public and may also refer to the institutional trading of these shares.
  • In real estate, cash equity refers to the amount of a property's value that is not borrowed against via a mortgage or line of credit.
  • Cash equity in real estate is separate from home equity, which is a measure of value relative to any mortgage balance remaining.
  • When homeowners want to utilize their home equity, they often borrow against it.

How the Cash Equity Trading Markets Work

Cash equity, in financial markets, refers to large financial institutions that trade stocks, or equity securities, on major exchanges, such as the Philadelphia Stock Exchange and the New York Stock Exchange (NYSE). These companies place trades using firm capital and also place trades for institutional and retail, or individual, investors.

Assume, for example, that Merrill Lynch buys 20 million shares of International Business Machines Corporation (IBM) common stock because the firm’s analysts believe the stock price is increasing over the next week. Merrill Lynch invests its own capital and uses computerized trading to place the trade almost instantly. The company hopes to generate a short-term profit and add the profit to firm capital.

Merrill Lynch can also place trades for large institutional customers, such as a mutual fund, and for individuals who work with the firm’s financial advisors. For instance, assume that a mutual fund client wants to purchase 10 million shares of Microsoft Corporation stock. Merrill Lynch negotiates a commission amount and then places the trade using its computerized trading system. On the other hand, if an individual investor wants to buy 100 shares of General Electric Company (GE) stock at the market, Merrill Lynch places the trades immediately using the same computer system.

In both instances, Merrill Lynch must place customer trades before placing trades for Merrill Lynch firm accounts, and this policy is in place to ensure fair trade executions for clients. If a brokerage firm wants to buy IBM stock using firm capital, but already has customer orders to purchase the same stock, the broker must place client orders first.

Understanding the underlying liquidity profile of different securities is important because some securities may be more easily converted to cash than others.

How Does Cash Equity Work in Real Estate?

In real estate, cash equity refers to the amount of a property's value that is not borrowed against via a mortgage or line of credit. When a homeowner purchases a property with a mortgage, they may be required to put money down against the purchase. Any money paid toward the down payment, along with regular mortgage payments toward the principal, can increase the amount of equity the homeowner has in the property.

Real estate equity can also be defined in terms of property values. When a property's value increases, that can increase the amount of equity the homeowner has, relative to what's remaining on the mortgage loan.

Discussions of equity in real estate can be related to a property's value as an investment. It can also tie into mortgage refinancing. For example, if a homeowner is interested in completing a cash-out refinance, their ability to borrow against the home may be determined by how much equity they've accumulated. This is what's more commonly known as home equity.

Home equity and loan-to-value ratios are key considerations for lenders when determining whether to approve a homeowner for mortgage refinancing.

Cash Equity in Trading vs. Cash Equity in Real Estate
Cash Equity in Trading Cash Equity in Real Estate
Cash equity in trading refers to the liquid portion of an asset that can be converted to cash. Cash equity in real estate is the amount of property valued that isn't borrowed against with a mortgage or line of credit.
Cash equity trading is typically done by larger, institutional investors rather than retail investors. Cash equity is included in home equity calculations, which measure the difference between the home's value and what's owed on the mortgage.
Investors that utilize a cash equity strategy typically aim to generate large returns from changing market conditions. In real estate, cash equity can increase monthly based on market conditions.

Examples of Cash Equity in Real Estate

Cash equity can increase each month. For example, assume a homeowner buys a $100,000 house with 20% down, and assume also that the house is worth $130,000. In this case, the owner has $20,000 in cash equity in the property and $30,000 in market equity. The owner's cash equity position increases each month as a portion of the monthly mortgage payment pays down the principal borrowed.

Market equity can change at any time because real estate markets and broader economic conditions fluctuate.

How Do You Calculate Cash Equity?

How you calculate cash equity will depend on whether you are considering cash equity in trading or cash equity in real estate. Cash equity in trading is the amount of a liquid asset that can be immediately converted to cash. When considering stocks, you would multiply the share price by the number of shares, and that would be your cash equity in the position. For real estate, you would take the total value of the property and subtract all portions of that value that are borrowed against with a mortgage or line of credit. The remainder is your cash equity (which fluctuates with interest rates and housing prices).

Is Home Equity the Same as Cash?

Home equity is not the same as cash, even if it is able to be fairly easily converted into cash. Home equity is simply the value of your home that is not borrowed against, but the value is still tied into the home. You would need to liquidate (sell) the house in order to realize that equity. Another option is to borrow against it through a home equity line of credit (HELOC).

What Is the Difference Between Cash and Equity?

The difference between cash and equity is that cash is a currency that can be used immediately for transactions. That could be buying real estate, stocks, a car, groceries, etc. Equity is the cash value for an asset but is currently not in a currency state. For example, if a stock portfolio is worth $1 million, that means that it has $1 million in equity. Liquidating the portfolio would also convert the equity into cash. Equity is also used to describe ownership in something, typically a company. When the company is sold or your equity vests, that ownership is converted into cash.

The Bottom Line

Cash equity can refer to a few things but is most commonly used as a term to describe common stock and the market that moves large blocks of stock with that market, or firm's, capital. In real estate, cash equity is the value of the home that is not borrowed against, which is typically the down payment and mortgage payments as they lower the loan amount remaining.

Article Sources
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  1. New York Stock Exchange. "Equities Products."

  2. Merrill Lynch. "Investments."

  3. CFA Institute. "Standard VI(B) Priority of Transactions."

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